What are closing day adjustments when selling a business?
The price in your agreement is rarely the exact amount that changes hands on closing day. Here's why, and what to check, in plain words.
What closing day adjustments are
Some costs and payments cross over the closing date. You may have paid rent for the whole month, or a customer may have paid you a deposit for work the new owner will do. Closing day adjustments make sure each side pays only for its own time as owner.
These are written on a statement of adjustments (sometimes called a closing statement). It starts with the agreed price, adds or subtracts each item, and ends with the amount the buyer pays on closing day.
Common items
- Prepaid rent and lease deposits. If you paid rent past the closing date, or the landlord holds your deposit and it moves to the buyer, you are usually credited.
- Property tax. If you own the property or pay its tax under your lease, the year's tax is usually split by date.
- Utilities. Bills are often split at the closing date, or meters are read on that day.
- Prepaid contracts and subscriptions. Insurance, software, service contracts or advertising you paid ahead may be credited to you if they carry on for the buyer.
- Inventory count at closing. Stock is often counted on or just before closing day, and the price goes up or down if the count differs from the agreed amount.
- Customer deposits, prepaid memberships and gift cards. If customers paid you for things the buyer will provide later, the buyer is usually credited.
- Accrued employee wages and vacation pay. If staff stay on, the buyer may take on wages and vacation pay they earned while working for you. This is often a credit to the buyer, or you pay it out before closing.
- GST/HST and PST. Sales tax may apply to some assets. In some asset sales, buyer and seller can file a special GST/HST election so tax isn't charged on the sale. PST rules differ by province. Ask your accountant.
- Equipment lease payments. Payments on leased equipment or vehicles are split by date, or the lease is paid out at closing.
Who prepares it
Usually the lawyers. One lawyer prepares a draft, often the seller's, and the other checks it. Your accountant helps confirm the figures. The lawyers then move the money through their trust accounts on closing day.
A simple example
This is an example with made-up round numbers. It is not advice, and your own figures will differ.
| Agreed price | $200,000 |
| Plus: rent you prepaid for the rest of the month | + $2,000 |
| Plus: lease deposit moving to the buyer | + $3,000 |
| Plus: extra inventory found at the closing count | + $1,000 |
| Minus: customer deposits for work the buyer will do | − $4,000 |
| Minus: vacation pay owed to staff who are staying | − $2,000 |
| Amount the buyer pays on closing day | $200,000 |
In this made-up example, the credits happen to balance out. In a real sale, the total is often a little higher or lower than the agreed price.
Tips for owners
- Keep clear records of prepaid items, deposits, gift cards and staff vacation balances in the months before closing.
- Ask for the draft statement a few days before closing, not on the day.
- Check every line against your own records. Small mistakes are common.
- Have your lawyer and accountant review the statement before you sign.
Earlier in the process, the main terms are usually set out in a letter of intent (LOI). Our free resource kit includes a timeline of all the steps.
Common questions
What is a statement of adjustments?
It's a one- or two-page sheet that starts with the agreed price and then adds or subtracts amounts for things that cross the closing date, such as prepaid rent or customer deposits. The final line shows what the buyer actually pays on closing day.
Who prepares the statement of adjustments?
Usually the lawyers. Often the seller's lawyer prepares a draft and the buyer's lawyer checks it, with figures from each side's accountant and records.
Can the adjustments change the amount I receive?
Yes. The amount you receive on closing day can be higher or lower than the agreed price. That's normal, as long as each figure is correct and matches your records.
Should I check the statement myself?
Yes. Read it line by line, and have your lawyer and accountant review it before closing. Small errors are common and are much easier to fix before the money moves.
Sources
Ready when you are
Listing is free and takes about 10 minutes. Your details stay private until you choose to share them.